If you're leaving your business premises, the last thing on your mind is what happens when your commercial lease comes to an end. Knowing everything about your commercial property lease agreement and being savvy to the potential costs of dilapidations can save you a fair penny down the road. The condition of a property begins to deteriorate from the date a lease starts, and most commercial tenants are obliged to keep the property they are leasing in a good state of repair.
With short term commercial leases of 3-5 years now common, disputes over dilapidation costs between landlord and tenant are on the rise. All too often, the issue of dilapidations are brushed under the table, until suddenly when a lease draws to an end, a business faces a dilapidations bill amounting to thousands of pounds.
Many companies have signed up to leases without any exit plan and many business leaders are unsure about how to estimate dilapidation costs or what is involved in the dilapidations process, i.e. “making good” the building to the original state it was in.
In our latest article, we explain what dilapidation costs are and how businesses can avoid being slapped with a hefty bill.
What does dilapidations mean?
The Royal Institution of Chartered Surveyors (RICS) describes dilapidations as “breaches of lease covenants that relate to the condition of a property during the term of the tenancy or when the lease ends.” Part of English Law, dilapidations legislation enables a commercial landlord to charge a tenant to put the property into a lettable state.
What kind of things do dilapidations include?
Dilapidation costs are varied according to individual lease agreements, but can include the removal of plants, furniture, partitioning, cabling, signage, safes, lift shafts and any other fixtures and fittings that have been installed since the start of the lease, as well as replacement of kitchen and WC facilities. Other costs include carpet replacement, repainting and changes to lighting. The list goes on.
What is a schedule of dilapidations?
A schedule of dilapidations, prepared by the landlord (or their dilapidations surveyor), is a formal list detailing items of repair, maintenance, reinstatement and decoration which a landlord considers are in need of remedy in order to comply with the terms of a lease.
A terminal schedule of dilapidations outlines the work to be done and is presented to the tenant by the landlord towards the end of the lease (usually in the last 6 months). Work must be completed before the end of the lease term.
Some leases allow tenants the option to exercise a break clause after a specified period of time. There will often be conditions associated with the break clause, which might include compliance with repair and decorating covenants. A landlord could refuse to accept the break if a tenant fails to comply with these conditions.
What is a schedule of condition?
A schedule of condition establishes if the property is in disrepair before you commence occupation and can help to reduce dilapidations liability. It can help support a case if there are subsequent disputes. It is good practice to seek agreement with the Landlord that the schedule is a fair reflection of the condition of the property. This is an important document that can be useful later on to establish responsibility for dilapidations.
A schedule of condition, a professionally prepared document consisting of descriptive text and supported by photographs, is usually compiled by a building surveyor after a thorough inspection of the property.
How to mitigate the risk of huge dilapidations costs
Read the small print
Before signing on the dotted line, it is imperative to read the small print of any lease agreement and importantly to understand the dilapidation implications. A full repairing lease, for example, could mean you have to pay for any structural damage to the building -- A big cost if you have a relatively short lease and won’t benefit from such an investment.
Seek legal advice
Always get a solicitor to read over your lease agreement and get a surveyor to look over the building – a dilapidations survey may seem like an unnecessary expense but could save you thousands later on. Ultimately, you want to know exactly what your liabilities are and that your repairing obligations are fair. You will also need to know if the landlord is able to enforce any repairing obligations during the lease term.
Be aware that a landlord is not obliged to serve a schedule of dilapidations before the lease expires so it is prudent to take advice from a chartered building surveyor on potential liabilities in time to carry out any necessary works.
Negotiating is important at the outset – from ensuring you are happy with the terms of your lease, through to a fair dilapidations schedule.
Budget for dilapidation costs
The real cost of dilapidations isn’t usually apparent until nearing the end of a lease, which means if a company hasn’t set aside funds for this, they could find themselves in financial difficulty. A substantial schedule of dilapidations could put a company out of business. It is really important to estimate dilapidations at the beginning of a lease and make a subsequent dilapidations provision throughout the term of the lease.
Allow time to carry out repairs and ‘make good’
When you are nearing the end of your office lease, be sure to allow enough time to carry out any repairs, adjustments or alterations to return the space to how it was when you moved in and/or in accordance with your lease agreement.
You can appoint an office fit-out company to carry out the work for you. It’s a good idea to use a reputable company with experience of dilapidations work. If you are doing the work yourself, check the lease to see what needs to be redecorated and cleaned and to what standard.
As a specialist dilapidations contractor, Trevor Blake Fit Out has worked extensively with businesses to complete remedial works in accordance with lease agreements and ensure commercial properties are brought back up to standard.
Contact our expert team now to find out more about our fully managed dilapidations service.